I’m often asked for my opinion on property as an investment, either in Portugal or elsewhere and I must admit it doesn’t tick many boxes as an investment.
For example, it is generally subject to income tax, capital gains tax and succession tax, as well as ongoing local rates. It cannot be converted into cash quickly or easily (illiquid) and it is expensive and time-consuming to maintain. It can also come with administrative issues such as unruly tenants, rental void periods and due to its static nature, it is difficult to plan around.
Having said this, property continues to be a popular investment choice as it is easy to understand and you can touch it, giving investors a sense of security and reduced risk. Additionally, we probably all know a few ‘property millionaires’. So, what are the planning angles and how can you ‘get out’ and enjoy your spoils tax efficiently?
Capital gains tax (CGT)
Portuguese residents are subject to capital gains tax (CGT) on their worldwide property gains, unless the property was purchased before 1st January 1989, in which case CGT does not apply.
For Non-Habitual Residents (NHR) selling Portuguese property and non-NHRs, CGT is due on 50% of the gain and is added to your other income in that tax year and taxed at scale rates. In addition to this, if the property is located overseas, tax may also be due in the country the property is located. However, if there is a double taxation agreement between the two countries e.g. Portugal and the UK, you should not pay tax twice on the same gain.
NHR status does not have an impact on the taxation of Portuguese property. The tax treatment is the same for NHR and normal residents, but despite the potential for eye-watering levels of tax, there are some reliefs available if the property you are selling is your main home – it does not apply to rental property sold in Portugal. The two reliefs mentioned can be used in isolation or conjunction.
- Main residence relief: You can mitigate all – or a portion of – the CGT by reinvesting the proceeds into another property in the EU or EEA. Any amount not reinvested is taxed
- Reinvestment into a qualifying pension or long-term savings structure: This is a relatively recent relief and is particularly advantageous for those wishing to downsize (and therefore will not fully reinvest the sale proceeds), or for those moving back to the UK or elsewhere outside of the EU/EEA. There are strict criteria for qualification and we can advise on this area but most notably, you or your spouse must be retired or above 65 and the gain must be reinvested in a qualifying structure.
Non-Habitual Residence (NHR)
NHR gives those selling foreign property an advantage as gains are exempt from CGT in Portugal. But what about the tax due in the country the property is located? Let’s look at UK property as an example. The UK only applies CGT to gains accumulated since 6th April 2015 and you will also have your annual CGT allowance to deduct of £12,300 per person. Additional reliefs may also apply, further reducing any gains, but this will depend on whether the property sold was your home or an investment property.
For example, if you bought an investment property in Portugal in 1992 for £100,000 and it was sold today at £1m, ordinarily tax would be due on the £900k gain. But selling this as a non-UK resident, you only pay tax on the gain since April 2015. Using the straight-line method, the gain is £212,000 from which you can deduct your annual CGT allowance, leaving a taxable gain of £199,700. Assuming you had no UK income in that tax year, the tax due to HMRC would be £52,146 which is an effective rate of 5.7%.
Download guide to property ownership in Portugal here.
The above article was kindly provided by Mark Quinn from The Spectrum IFA Group and originally posted at: https://www.spectrum-ifa.com/spanish-tax-on-personal-pensions/